How the Fight Over the $50B Systemic Cutoff Will Play Out

A push to revisit how banks qualify as “systemically important” under the Dodd-Frank Act is gaining momentum, but questions remain on how to resolve the problem.

Regulators, lawmakers and bankers have all taken issue with the $50 billion threshold in recent months — above which banks are considered systemically important — arguing that it subjects several less risky institutions to burdensome and unnecessary regulations.

We offer some frequently asked questions about the growing debate over the cutoff and how the fight is likely to evolve in Congress — including upcoming hurdles.

What's the political appetite to take this on?

There’s definitely growing interest around the issue from both Democrats and Republicans, and lawmakers are bolstered by growing calls for a change from regulators. Analysts predict that no matter which party has control of the Senate next year, the issue is likely to take center stage and could even move towards passage, thanks to such broad-based support.

“When it comes to raising the SIFI threshold, the question to me is not if, but when and how high,” said Edward Mills, a policy analyst at FBR Capital Markets.

Lawmakers on both the Senate Banking and the House Financial Services Committees have raised the issue at hearings, citing concerns about the $50 billion yardstick being arbitrary and insufficient.

Sen. Sherrod Brown, D-Ohio, a lead contender to run the banking panel next year if Democrats keep the chamber, hosted a hearing on the designation of systemically important banks in July. He pointed to three Ohio banks — Huntington Bancshares, KeyCorp and Fifth Third Bancorp — noting that while they are all bigger than $50 billion, they “operate under a traditional banking model” and would not threaten the financial system if they failed.

Analysts suggested Sen. Richard Shelby would also likely take a look at the issue, though perhaps as part of a broader strategy for reform of the Financial Stability Oversight Council and its membership.

“I think this is one of the top three issues he’d care about,” said Brandon Barford, a partner at Beacon Policy Advisors. “If he had to choose, I believe he cares less about the threshold number and much more about the process — he wants the voices of minority party regulators to be heard on the FSOC.”

Former Rep. Barney Frank, D-Mass., a key author of the financial reform law, also testified before the House banking panel in July that lawmakers should revisit the $50 billion threshold. And several regulators, including Federal Reserve Gov. Daniel Tarullo and Comptroller of the Curry Thomas Curry, have made similar statements in recent months.

Do lawmakers agree on how to change the threshold?

No, and that raises questions about how quickly a fix could be put into place. There are several possible solutions for how Congress and regulators could change the process. The most straightforward would be to raise the figure higher, to, say, $100 billion or $250 billion. Or lawmakers could direct regulators, perhaps the FSOC, to use a designation process like that employed for systemically important nonbanks.

“There’s a strong growing bipartisan consensus on the Hill and among regulators that it needs to be something other than $50 billion, but it doesn’t appear there’s yet enough clarity about what that should be—either qualitative/business model standards or a higher number,” said Dwight Fettig, a partner at Porterfield, Lowenthal, Fettig & Sears and the former director of the Senate Banking Committee. “It’s one of those issues that will take a little more time to ripen.”

Perhaps the best argument for just lifting the threshold is its simplicity.

“The initial push by the community bank lobby and the regional bank lobby will be to raise the threshold number—it’s convenient for members and it is a discreet ask,” said Barford. “It is a lot harder to change a process that has maybe a dozen or more components.”

But there are problems with that approach as well, particularly since raising the figure to something like $100 billion would only help a small handful of banks. It’s also unclear that it actually solves some of the underlying concerns with the threshold.

“The logic against a bright line is pretty compelling — wherever you set that line, if you’re a little bit under it, and all of a sudden you acquire two branches across town, and you’re now over it, how can you all of a sudden be systemically important?” said Aaron Klein, director of the financial regulatory reform initiative at the Bipartisan Policy Center. “It’s hard to imagine that simple organic growth within existing business lines that are a small percentage of your assets can suddenly trigger systemic risk worthy of enhanced prudential standards.”

The Bipartisan Policy Center has endorsed a hybrid approach that would raise the threshold to $250 billion, but establish more of a “dashed line” that would also give regulators discretion to add firms based on risk factors other than size and keep out firms that are large but involved in more traditional banking activities.

“Assets are just one number — interconnectedness, scope of activities and market share are all other factors,” Klein added.

Meanwhile, Rep. Blaine Leutkemeyer, R-Mo., has introduced legislation that would get rid of the numeric threshold altogether, and instead direct regulators to look at the different business activities of an institution in determining whether or not it is systemically important. His bill currently has 77 bipartisan cosponsors in the House.

“The text of the Dodd-Frank Act clearly intended for enhanced prudential regulations to be applied in a graduated fashion based on a variety of factors, not just assets,” said Andrew Olmem, a partner at Venable and former Senate Banking Committee staffer.

Still, it’s possible that handing over increased discretion to regulators could stoke its own concerns.

“Regulatory discretion presents its own set of challenges when it comes to both consistently applying the same criteria across the spectrum,” said Klein. “There’s a tension between providing regulators with more discretion and hardwiring thresholds.”

What are some of the biggest hurdles to passage?

Disagreements over regulatory discretion are likely to be at the heart of the upcoming fight over the SIFI threshold. In addition to the designation process for SIFI status, a separate-but-related fight has been brewing over FSOC’s designation of nonbanks. Critics, including many House Republicans, have charged that the nonbank designation process for insurance companies has been opaque.

The nonbank companies being reviewed by the FSOC have been equally vocal. Insurance company MetLife announced last week that it plans to challenge its proposed designation. Fellow insurer Prudential weighed legal action over its designation last fall, though it opted not to do so after losing the regulatory appeal process.

“As much as Republicans would love to increase this threshold, I get the sense that they are more concerned about giving additional power to regulators, especially given the criticism of the designation process in nonbank space,” said Mills.

Moreover, it is not clear that the political debate has moved far enough along that those fault lines are even fully visible yet. “The concerns around bank and nonbank designations will be conflated together when there finally is real political will for hearings and discussion drafts — that is also when the true divisions will begin to show,” said Barford.